Boeing, Northrop Await GAO Verdict

Will the Air Force's choice of Northrop Grumman for its huge tanker contract pass muster? Whatever the ruling, it still might not end the matter

Keith Epstein

June 17, 2008, 5:01 AM EDT

A $30 billion U.S. defense acquisition—one of the modern military's most lucrative, most needed, and most tinged by delay, controversy, and politics—now comes down to the assessment of a single arbiter: the head of a small, behind-the-scenes, 9-to-5 team of bureaucrats at the Government Accountability Office (GAO), the investigatory arm of Congress. This anonymous adjudicator is an unassuming, friendly man who travels to and from work at around the same time each day on a Northern Virginia commuter train.

The fortunes of three major contractors—to say nothing of a bevy of hundreds of global subcontractors and suppliers—hinge on the imminent determinations of this man's tiny secretive group, which has been holed up for weeks in a Washington office perusing thousands of pages of documents and data on numerous disks. Those proprietary documents detail the unexpurgated story of how, on Feb. 29, the U.S. Air Force chose Northrop Grumman (NOC) rather than Boeing (BA) to replace 179 refueling tanker aircraft.

Boeing, stunned by the Air Force decision, protested formally (BusinessWeek.com, 3/18/08) in March, complaining that the Air Force skewed the contest unfairly in favor of Northrop. The GAO, following the first step in any appeal of a federal contracting decision, is expected to say this week whether it finds any merit in Boeing's position. The announcement, among the business world's most closely watched developments this week, could be made any time between now and June 19. It might come in the form of a detailed report, or a single summary sentence.

The Air Force then may take a month or two deciding what, if anything, it will do as a result of the GAO's findings. Among the possibilities: a new competition for the lucrative award, the first of three for which the Air Force is expected to spend $100 billion over 30 years to replace its antiquated refueling tanker fleet. Such a competition could take place by next February, and permit Boeing to offer an aircraft modified in a different way, or even a different aircraft. In any event, the GAO tends to rule narrowly, basing its decisions on whether federal agencies comply with procurement regulations, so the long-awaited verdict is unlikely to signal an end to the matter.

Questioning the Process

The corporations involved and some specialists in government contracting anticipate a murky outcome, in which the GAO criticizes at least some aspects of the way the Air Force chose Los Angeles-based Northrop and partner European Aeronautic Defence & Space (EADS)—providing useful ammunition to Boeing and its allies (BusinessWeek.com, 3/10/08), and adding to the multiyear delays in replacing the military's aged, high-maintenance tanker fleet.

Northrop isn't exactly anticipating a slam dunk. Spokesman Brandon "Randy" Belote predicts the GAO will identify "a couple of minor issues" in the way the Air Force awarded the contract. "But at the end of the day the protests will be denied and we'll move on," predicts Belote. "If we get an A-minus rather than an A-plus on the ruling, well, in our book an A-minus is still a passing grade and we can move forward…we'll be vindicated. The Air Force will turn the contract back on."

The GAO might raise questions about the process that not only gives weight to Boeing's argument but questions how the military chooses what to buy and from whom. Boeing contends the aircraft chosen by the Air Force—a modified Airbus A330 made in France to be adapted and assembled in Alabama—is very different from what the Air Force said it wanted. Otherwise, say Boeing executives, they would have offered a modified 777 rather than a 767, which is smaller and can carry less cargo and fuel than the A330-based tanker. Boeing also complains about European subsidies that the company asserts gave Northrop/EADS a cost advantage.

"The Air Force says its process for picking the tanker was transparent and fair, but it sure looks murky to me," says Loren Thompson, a Lexington Institute defense analyst with close ties to the military. "It's hard to have confidence in a process that repeatedly confounds warfighters and technical experts." Thompson, once dismissive of Boeing's complaints, now views them as having possible merit.

Beginning or End of Competition

For Boeing and its backers, any GAO criticism can help. If Boeing's complaints are sustained, "we'll end up in a recompetition" for the contract, predicts Boeing Vice-President Mark McGraw, who heads its once sure-bet tanker program. But as uncertain as the GAO verdict is, the Air Force response to it is even less known. And without sufficient criticism from the GAO, Boeing supporters in Congress may be unable to muster sufficient votes to follow through on threats to withdraw spending on the tankers. "We'll listen to the Air Force throughout the process and take our position accordingly," McGraw says. "How they want to go at it and how the Congress weighs in will drive a lot of this."

Criticism of the Air Force for making a few small, insignificant mistakes could make it an uphill climb for any further action by Boeing, whose lawyers have contemplated a challenge to the U.S. Court of Administrative Appeals, or by members of Congress who have tried to force the Air Force to redo its competition for the tankers.

"If GAO finds minor errors in the process but nothing significant, this could be over, because I don't see how Boeing proponents in Congress will put together the kind of majority they need to block funding of the Northrop plane," Thompson says. "On the other hand, if major problems are identified, it's certain there would be a recompetition. And that would leave the whole award up in the air for another year." Aerospace analyst Paul Nisbet of JSA Research doubts a favorable outcome for Boeing. "I don't think there's enough to derail this," he says.

Much More at Stake

There's more at stake than the $35 billion contract. The winning aircraft manufacturer and its subcontractors will likely have an edge on the entire $100 billion replacement of the U.S. aerial refueling tanker fleet, and the military in other countries likely will favor the manufacturer as well. For EADS (EAD.PA), the contract could mean an all-important first step toward ambitions in North America—a threat to long-dominant aerospace player Boeing.

"The Boeing protest has less to do with the tanker than it does with EADS getting a toehold" in the U.S., says Scott Hamilton, who runs the Leeham consulting outfit in Issaquah, Wash. That means not only a toehold in the U.S defense business, but also a factory in Alabama that could easily be ramped up to build Airbus A330 passenger jets. That would give Airbus big relief on the euro-dollar exchange rate—and a competitive challenge to Boeing.

For now, both contractors are operating in the dark. Under terms of a protective order, even executives of the major corporations involved are barred from communicating with the GAO's procurement law division, which reports to the federal government's comptroller general, or from seeing many of the documents turned over to the office. Corporate lawyers are not supposed to share with their clients what they hear.

For the small GAO staff, whose caseload usually involves protests over smaller government contracts—two February, 2008, decisions, for instance, involved the use of appropriations for bottled water, and on the U.S. Forest Service's payment for light refreshments on "National Trails Day"—Boeing v. Northrop has proven unusually overwhelming. The chief arbiter assigned to the case has told associates of the heavy workload and of the many gigabytes of data on his computer.

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